What is the U.S. Auto Industry Outlook for 2013?

On Thursday, January 24, 2013, the Detroit Association for Business Economics (DABE) held its annual Bob Fish Memorial Automotive Outlook luncheon. The speakers for this event were Joseph Barker, from the Industry Analysis Group of General Motors (GM), and Mike Jackson, senior manager of North American production forecasting at IHS Automotive. Barker discussed the U.S. automotive sales outlook for 2013 and beyond, while Jackson concentrated on the North American production forecast. Both of these analysts are strong industry experts, excellent presenters, and former colleagues of Bob Fish—a former president of the DABE and one of the group’s founders.

Light vehicle sales for 2012 started better than expected because of pent-up demand for commercial fleet vehicles and the pushing of product by Japanese original equipment manufacturers (OEMs) to meet their fiscal year targets, said Barker. Vehicle sales slowed slightly in the third quarter once the pent-up demand for commercial fleet vehicles was met. Additionally, it was estimated that the effects of Hurricane Sandy lowered sales in October by as many as 300,000 units. However, seasonally adjusted annual rates of auto sales were 15.5 million and 15.3 million units for November and December, respectively; thus, the auto sales rate in the fourth quarter of 2012 reached its strongest level since 2007 and helped pushed calendar year light vehicle sales for 2012 to 14.4 million units.

Barker said that the mix of light vehicle sales in 2012 shifted more to compact and mid-size cars when compared with the mix in 2011, thanks partially to the sales of outgoing models at discounted rates and sales of replacement models that were particularly attractive to buyers. Loyalty to luxury vehicles showed signs of decreasing, with fewer luxury car owners returning to the luxury market. Also, smaller percentages of non-luxury vehicle owners are trading up to the luxury market. Toyota and Honda saw improvements in their respective market shares, which had been hurt from the disruption in parts and supplies caused by the 2011 Japanese earthquake and tsunami; however, their market shares still haven’t recovered to pre-disaster levels.

On the pricing front, the major manufacturers saw a reversal from downward price pressures caused by overcapacity in the industry, said Barker. Average transaction prices were similar or slightly higher for the largest seven OEMs (Chrysler, Ford, GM, Toyota, Honda, Nissan, and Hyundai). In addition, average incentives as a percentage of average transaction prices for the largest seven OEMs have converged since the end of the recession indicating a less discernible difference in product quality between the manufacturers. However, the incentives for the Detroit Three OEMs (Chrysler, Ford, and GM) are still slightly above the industrial average. Even with this firming of prices, falling interest rates on loans and better leasing conditions have pushed Comerica Bank’s Auto Affordability Index to one of its lowest levels on record. Comerica’s index calculates the number of weeks of median family income needed to buy a new car; the index reported this value to be just 23.1 weeks for the fourth quarter of 2012 (compared 24.2 weeks for the fourth quarter of 2011).

Improved affordability, along with the fact that the average age of the current fleet of vehicles in operation is at a record high, has helped increase the percentage of consumers intending to buy a new vehicle within the next six months, according to Barker. Although Barker said he expects there will be a deceleration of sales growth, annual sales for 2013 should rise to between 15.0 million and 15.5 million units. This outlook remains slightly bearish because of the following factors: the upcoming fiscal policy debates, the anticipated decline in the rate of real gross domestic product (GDP) growth that is slightly below the long-term historical rate, and continued slow growth in new home construction. But auto sales are expected to keep increasing until reaching 16.6 million units in 2016.

According to Jackson, the post-recession restructuring of the industry will help narrow the gap between North American sales and production going forward meaning that more of the vehicles sold North America will also be built in North America. Long-term output levels will exceed pre-restructuring levels because of increased exports, OEM expansion, and more localization of production. One of the major concerns about the growth in production plans is whether the supply chain can handle higher production levels with 20% of existing plants already running three shifts and with significant amounts of production capacity having been eliminated (by shuttering plants) over the past few years.

Going forward, “Asian Four” OEM (Toyota, Honda, Nissan, and Hyundai) production will be at least equal to GM and Ford production combined, whereas in previous years, GM production alone was double that of Asian Four OEM production, said Jackson. Jackson also noted that the Asian Four manufacturers will increase their North American production of light vehicles for sale here and abroad because North America is viewed as a safer market with lower currency risk. North America will lead in the production of high-margin crossover utility vehicles. And there will be many new products launched in the coming years. Currently, there are 45 new product launches planned for 2014 and many more in the pipeline. Jackson expressed measured optimism about the supply chain being up to the task ahead.

According to Jackson, the North American light vehicle production forecast for 2013 is 15.9 million units—which is just 3.2% higher than the level of 2012 but 84.9% higher than the recessionary low reached in 2009 of just 8.6 million units. Production of light vehicles in North America is expected to continue to rise, reaching 17.0 million units by 2015, noted Jackson.

For more detailed information and a copy of both presentations, please use the links below:
Joseph Barker’s Presentation: U.S. Light Vehicle Sales Outlook 2013
Mike Jackson’s Presentation: N.A. Light Vehicle Production Outlook 2013

What is Canada’s Role in the U.S. and Michigan Economies?

In the wake of the worst recession the world has seen in many decades, Canada continues to play an important role in the economic recoveries of both the United States and Michigan. Canada has long been one of this country’s biggest trading partners. The chart below shows how U.S. trade with Canada has grown over the years. Although Canada’s total share of U.S. goods trade has fallen slightly over the past 20 years, the dollar value of that trade has grown by more than 250%.

US Goods Trade with Canada

Even though trade between the U.S. and Canada declined sharply following the 2008 recession, Canada was able to hold on to the bulk of its share of total U.S. goods trade. The charts below display the shares of imports and exports for the United States’ top five trading partners since 2007. They show that Canada’s share of total U.S. trade of goods has remained relatively constant since 2007, accounting for approximately 14.2% of U.S. imports and 19.1% of U.S. exports in 2012. Moreover, as seen in the charts, Canada has maintained its position as our largest export partner and second largest import partner throughout the recession and through this point in the recovery.

Imports and Exports with Canada

Additionally, when it comes to Michigan’s economy, the importance of Canadian trade is just as large if not greater. According to my calculations using data from the U.S. Census Bureau, Canada ranks number one for Michigan in terms of both imports and exports. In fact, 44.7% of Michigan’s imports in 2011 came from Canada. At $46.7 billion, the value of Canadian imports to Michigan in 2011 was up 14.6% relative to 2010. As for exports from Michigan to Canada, the story is very much the same. In 2011 Michigan exported $23.6 billion in goods to Canada—up 6.7% relative to 2010. Since most of the import and export goods pertain to the auto industry, it only stands to reason that these numbers should continue to increase as light vehicle sales continue to improve.

In an effort to provide more insights into this topic, the Canada – United States Business Association (CUSBA) will be holding an event here at the Detroit Branch of the Federal Reserve Bank of Chicago. The event titled Cross-Border Economic Forecast for 2013 will be held here on Friday, February 1, 2013, from 11:30 a.m. to 1:30 p.m. I was pleased to be asked to participate in this event. Joining me on the panel to discuss the 2013 economic outlooks for the United States and Canada will be Martin Schwerdtfeger, senior economist for Toronto-Dominion Bank, and Daniel Howes, associate business editor for the Detroit News (who will serve as the moderator). To read more information about this event, visit www.cusbaonline.com or go to the “Upcoming Events” tab on the Michigan Economy blog to access and print a flyer with all the information.

Michigan Economic Update

I would like to open with a short introduction of myself and the newly created Michigan Economy blog. My name is Paul Traub and I am a Business Economist for the Federal Reserve Bank of Chicago.

In this spot, I will offer some insights into the ongoing performance of Michigan’s economy as well as some analysis of important public policy issues, manufacturing, construction, services, employment and of course the auto industry. I must be honest that I have never won a notable award in economics and I’ve yet to appear on a late night talk show. But, I have lived in Michigan my whole life and worked in the Detroit area my entire working career. My hope is to be able to use my knowledge of Michigan and my working experience together with my understanding of economics to provide an analysis of Michigan’s economy that is rooted in an understanding that only a true Michigander could possess. I hope to engage the reader in a way that we all learn more about this great state and its many opportunities.

I would not venture to engage in this endeavor without the support of a great amount of talent to back me up. The Chicago Fed has a number of very talented economists and researchers that I can and will call on for help. Some of them – such as William Testa, Thomas Klier, David Oppendahl, William Strauss and Martin Lavelle all offer a volume of expertise that would be difficult to match anywhere in the country. And of course, I would be remiss not to mention Scott Brave whose work on the Midwest Economic Index will help to make much of the analysis I will be sharing possible.

In addition, I will be posting some results from many of our local conferences, presentation materials from some of my public appearances, an occasional cross posting of articles from the Chicago Fed’s Midwest Economy blog as well as links to other data resources. As a regular feature, I will offer a monthly summary of Michigan’s economy. It will contain information about different sectors of the economy as well as data on things like employment, income, housing and the consumer. So if you are from Michigan or just interested in the economy of the Midwest, I’m confident you will find something here that will help you to understand Michigan’s complicated economy just a little better.

A summary of Michigan’s Economy

Michigan’s economic growth improved slightly in November, according to the Federal Reserve Bank of Chicago’s MEI Index for Michigan. The index remained below zero, indicating that growth is still below Michigan’s long-term average, but it increased to -0.04 in November from –0.09 in October. Manufacturing’s contribution to the index turned positive again following two months of decline. The most favorable change was the positive contribution from the construction sector, marking the first positive contribution to the index from construction since September 2005.

Michigan’s per capita income rose by 0.6% in the third quarter of 2012 on a year-over-year basis, although this increase was slightly smaller than in the second quarter. Based on data through the third quarter of 2012, Michigan’s GSP is estimated to be growing at a 0.8% pace relative to 2011. Most of this growth is due to positive contributions from manufacturing. Such positive developments should stimulate Michigan’s economic growth through the end of the year.

Other key indicators include:

•     Michigan’s unemployment rate declined to 8.9% in November from 9.1% in October;
•     Michigan’s housing market is showing some minor improvement, which may be an indication that the housing sector is on the mend; and
•     U.S. light vehicle sales remained strong in December, helping to drive Michigan’s light vehicle production for 2012 to its highest level in in five years.

For a more detailed look into the numbers behind Michigan’s current economic performance, follow the link to the Chicago Fed’s Michigan MEI – 201301.